Accepting and Retaining Gifts of Farmland

Accepting and Retaining Gifts of Farmland

Article posted in Real Property on 7 April 1999| comments
audience: National Publication | last updated: 18 May 2011


What category of asset is located on 945,000,000 acres throughout the United States with an estimated value of $687,432,000,000? In this edition of Gift Planner's Digest, University of Idaho Director of Gift Planning, Ed McBride offers some helpful tips on dealing with charitable gifts of farmland and why not-for-profit organizations should have a policy in place for accepting and retaining such gifts.

by Edward J. McBride

In The Chronicle of Philanthropy (January 28, 1999), there was an article on the growing number of charities accepting-even soliciting-gifts of real estate. A large percentage of that real estate is in the form of farmland.

Why be concerned about gifts of farmland? Consider these statistics from the 1992 Census of Agriculture, Department of Commerce, October 1994:

  • There are over 945,000,000 acres of farmland in the United States.

  • Total value of all farmland is $687,432,000,000.

  • There are 1,925,000 farms.

  • These farms are owned by 1,100,000 people.

  • Farm operators have a median age of 53.3 years.

Consider also that farm owners have strong emotional ties to their land and many desire to see the land continue as farmland indefinitely. This is true even for people without direct descendants. Many farms have been in the same family for 100 years or more.

A common concern is that the land loses its family identity once it is sold, either by the current owner or by his estate representative. This same concern extends to a gift of the land to a favorite charity. People are concerned that if they donate their land to a charity via their will, it will immediately be sold for the highest price without consideration being given to its ultimate use by the buyer (i.e., for development or some other non-farm use). Except for this perceived outcome, many would be open to making a gift of the land to charity.

What does the term "farmland" include?

1) Tillable acreage:

  • Orchards

  • Dryland farms

  • Irrigated farms

  • Virtually every kind of grain and crop land

  • Vegetable and truck farms

2) Forest lands

3) Rangeland

  • Livestock grazing, etc.

  • Recreational land

Why should a charity have a policy on accepting and retaining gifts of farmland? Why not just a policy that mandates the disposing of farmland as quickly as possible after it is given? Reasons to consider include that such a policy provides reassurance to prospective donors; and it creates an institutional memory.

Farmland gifts may be given using a variety of gift planning techniques:

1) Outright inter vivos gifts

2) Bequests (or, more legally correct: devises)

3) Retained life estates

4) Funding for life income plans, including:

  • charitable remainder annuity trusts

  • charitable remainder unitrusts, and

  • gift annuities.

Initial Considerations

In deciding whether to adopt a policy of accepting and retaining gifts of farmland, charities need to consider the following:

  • Location-proximity to institution

  • Size: Is it big enough to be a stand-alone economic unit?

  • Nature of use: Is it compatible with the charity's mission (e.g., is a tobacco farm an acceptable gift for a hospital or health-care charity)?

  • Relationship to donors: What has been the connection up to this point in time?

  • Environmental hazards

  • Donors' "conditions" if any: What limitations or requirements is the donor attaching to the gift?

The charity should also formulate a list of reasons for retention of farmland. Among them might be:

  • the donors' expressed wishes

  • as an incentive to others, or

  • as a sound investment

The factors, or burdens, of ownership to be considered include such things as:


  • Is the charity sufficiently staffed to provide necessary oversight?

  • Is there reasonable accessibility to outside consultants and advisors?


  • Does the responsible staff have adequate training and knowledge of land ownership issues?
  • Are there volunteers available to assist with advice and review? Perhaps there are other staff persons (e.g., in a university setting, college of agriculture faculty members), members of a governing board of the institution or supporting foundation.


  • Do the responsible staff members have adequate time, given their other duties, to attend to property ownership issues?

  • Are there financial resources sufficient to cover travel and other costs?

  • Has the institution established a reserve or emergency fund to cover unexpected costs?

Institutional Commitment:

  • A key to the success of such a program is a "buy-in" conceptually by the charity's top administrators. This includes a commitment to underwrite positions and programs as needed.

Policy Provisions

Having decided to establish such a policy, the institution needs to proceed with developing it. A suggested format follows:

A declaration of purpose should be created and include such things as the reason for the policy, the types of gift vehicles for farmland gifts, and a statement of intent to retain farmland indefinitely.

The policy also needs to address the issue of establishing parameters of indefinite ownership, to include:

1) the definition of "indefinite." This should not mean "in perpetuity" but rather, for an indefinite period of time, within the guidelines set; and

2) retaining a right to sell under appropriate circumstances.

  • Criteria to consider include such things as under-productive property (i.e., the net return from the property is below some predetermined level making it a poor investment); the property becoming a political liability by reason, perhaps, of it being "off" the tax rolls, or the particular charity being an unpopular one in that area; UBTI issues (these should always be revised in advance).

  • Consultation with donors or heirs. Does the donor want to stipulate that he/she and heirs should be kept "in the loop?" Is the charity willing to talk to the donors about how it is handling the farmland? Is it willing to reach out to heirs, who may or may not have any interest in how it's handled?

  • Include a "reasonable efforts" provision. As the years roll by and the heirs become more distant, both geographically and relationally, it could become ever harder to find them. A "reasonable efforts" clause allows the charity some latitude so that it doesn't have to go to extreme lengths to try to find these people.

  • In any event, the charity should always retain the final say. Input from donors and heirs is for advisory purposes only, and not for them to have a "vote" in such decisions.

3) Establish a procedure to follow.

  • Consider having provisions that vest the decision in a specific committee or board and, if such a body is not part of the charity's structure (i.e., gift acceptance committee, land-use committee, etc.), then establish it through the policy statement.

  • Create a checklist and establish definite criteria to follow when considering a possible sale.

  • Include a reference to the use of outside consultation services (but it would be preferable not to make this mandatory).

  • Price considerations should also be part of the policy, but avoid reference to a specific price or value, as this can change dramatically over the years.

Farmland Ownership Issues

Factors inherent in ownership of farmland need to be addressed (i.e., tillable acreage).

Tenant Farmers: Do you retain the ones the donors had? Keep in mind that, often, strong ties develop between landowners and tenant farmers, especially if they have been associated in this way for some time. Occasionally it may even be a condition of the gift, i.e., the donors will insist that the charity retain their tenant farmers, at least for a certain number of years. Part of due diligence, though, will dictate that the charity satisfies itself with the tenant farmer's capabilities, farming practices, integrity, and honesty.

If the same tenant farmers are retained, the charity should enter into a formal, written lease with the farmer, even if the donor had not previously had one (which, interestingly, is often the case). It may be one that basically continues the previous arrangements with the donor. Trying to change terms can be a challenge as it may be viewed as an assault on the donors' integrity.

Lease provisions should include, at a minimum:

  • Term (duration)

  • Rent determination, i.e., cash rent, crop share, or some other arrangement

  • Who is responsible for costs? With a cash rent or lease, typically the landowner's obligation is to pay the taxes and any costs of permanent, or capital, improvements. Under a crop share arrangement, the landowner will often share in the cost of fertilizers and chemicals, and possibly other costs associated with production, in addition to taxes and costs of capital improvements.

  • Oftentimes, the type of lease and the responsibility for payment of costs is dictated, at least in part, by the prevailing practice in that particular area.

  • Compliance with laws and regulations: It should clearly state that a violation of local, state, and national laws is a breach of the lease.

  • Avoidance or abatement of environmentally hazardous operations is another factor to address. Of course, in a farming operation, it is virtually impossible to abolish all environmentally unfriendly operations-that would mean the virtual elimination of mechanized farming, the complete abatement of herbicides, pesticides, and commercial fertilizers, and even the cessation of farming activity on erodable acreage. But provisions should be included that obligate the farmer to comply with all environmental laws and regulations, plus an indemnification clause for tenant-created or tenant-allowed environmental hazards.

  • Default provisions: The lease should address what rights of action the land owner (the charity) has in the event the tenant fails to carry out the incumbent duties.

  • Renewal options: Does the tenant farmer want, or require, an option to renew the lease for a like period of time? Is it in the best interest of the charity to agree to this?

Operation and management by charitable entity: Should the charity, through its own staff (e.g., a college of agriculture within a university) be the farmer? A note of caution: Charitable remainder trusts that produce UBTI are subject to a 100 percent excise tax on such income.

Other factors involved in the ownership and operation of farmland include:

  • Use of chemicals and fertilizers: Environmental issues and the possibility of revised standards over the years. What alternatives are available if certain chemicals or practices (e.g., stubble burning) are outlawed?

  • Changes in government programs such as crop production allotments, reserve programs, conservation standards, and government subsidy programs. This is in a constant state of change so the charity needs to be ready to keep up on the current law.

  • Ad valorem (real estate) taxes: The charity may be exempt by reason of its tax-exempt status for federal income tax purposes, but not necessarily. One does not follow the other. Check with local taxing authorities. Even if the property is placed on the exempt rolls, consider an "in lieu" payment for public relations purposes. It's not always a popular thing to have a big block of land go off the tax rolls.


Forestland has the potential for a sporadic income stream since timber harvests are usually years apart. Large acreage may permit annual selective logging in different areas so that there is a more or less regular source of income.

Timber stands should be regularly cruised to check for evidence of disease, insect infestation, storm damage, etc. Good management practices may call for removal of diseased, damaged, and fallen trees, even if such action is out of the normal cycle.

A charity may well want to consider having the forest managed by a company specifically set up to provide professional forest management. It adds a cost factor that must be taken into consideration, but it may prove, in the long run, to have net economic benefits by reason of their expertise. Selection of a competent forest manager is the key.

Provisions for timber harvests:

  • Criteria should be in accordance with generally accepted standards.

  • Timber management should be "ecologically sound."

  • "Best management practices:" A commonly recognized standard in the industry. It may include a regular program of reforestation. This could also be an additional cost factor, but it may prove to be excellent for public relations.

  • Possible research and teaching value, but limited application to institutions with appropriate resources such as a university with a college of forestry. But, if it is used for this, it may or may not produce income.


Typical use: grazing and pasture. This means the charity may need grazing agreements and leases. There may be public relations issues: The use of public rangeland for grazing is coming under increasing criticism from environmental groups concerned about the ecological damage created by over-grazing, etc. The same kind of public attention may be directed to a charity owning and leasing grazing rights.

Generally, rangeland produces a low-income stream since grazing land is fairly abundant and rental value is low. Also, there may be competition with USFS leases.

Environmental concerns include:

  • over-grazing by lessees;

  • the potential for watershed pollution; and

  • possibly adverse to wildlife habitat.

Accessibility issues:

  • The donee needs to be able to regularly visit all real estate owned or held in trust.

  • If the land is so remote as to present access challenges, it may not be appropriate for charity to agree to keep it.

Liaison and Oversight

For the purpose of keeping track of real estate, consider appointment of a committee.

  • Membership should include key staffers as well as knowledgeable volunteers.

  • The committee should report to the trustee or directly to the charity.

  • A question to decide: Should it be advisory only or have decision-making power?

One person should be the primary contact for user/occupant/tenant, with authority to make decisions, tantamount to an agency relationship. Regular and consistent contact with tenants is important. It keeps lines of communication open, allows charity to stay up on developments, and permits timely correction of problems.

All persons involved with liaison and oversight need to be fully conversant with the charity's guidelines and policies.

Environmental Issues

It's almost always a must to get a Phase I Environmental Assessment. Acceptance of the property by the charity would be subject to a "clean" report being issued. The following factors should be considered:

  • Use applicable state and federal standards.

  • If problems are detected, donor has the option to reimburse the charity for the cost of Phase I (if paid for by charity); or undertake Phase II at his/her expense and bear all costs of corrective measures.

Should the donor or the charity pay for the cost of Phase I? A typical Phase I can cost anywhere from $1,500 to $3,500 for a relatively simple assessment. Presence of buildings, difficult or varying geography, and extensive acreage could run the cost even higher.

Many institutions (e.g., universities) may have qualified people on staff to conduct a Phase I assessment. Consider, however, liability if pre-existing hazards are later discovered. There might well be a claim against an outside firm that would not be available if done "in house."

There may be instances where the cost and trouble is not justified, such as "bare" farm ground with no buildings or other improvements. Consider doing a preliminary inspection by a planned giving office staffer indicating no significant environmental hazards present. For such a purpose a checklist should always be used.

Consider including a "sign-off" by the donor that he/she has no knowledge of environmental hazards. Consider also such things as buried tanks not readily detectable; discarded chemical containers covered over in remote locations; and the history or evidence of significant chemical spills by current or previous operators.

The investigator may be legally bound to report environmental hazards posing serious threats to public safety, health, and welfare, and donors should be apprised up front of this possibility. If a major problem is discovered, he/she could become legally obligated to abate it. This could be very expensive and could create a serious public relations issue with the donor.

Also consider indemnification by the donor, obligating the donor and his/her estate to hold your charity harmless in the event pre-existing environmental hazards are later discovered. Is this advisable? Well, how badly does the charity want the land? It could backfire with a donor, but the caveat may be: If the donor balks, what's the real message? In other words, is he/she trying to pass off "dirty" property in the guise of a philanthropic gesture?

Ongoing environmental hazards issues (after acceptance of gift). What about the creation of new hazards by current or future tenants? Or changes in the law that impose more stringent criteria? The potential for ever-changing standards is high, in light of enhanced scientific measurements and new discoveries about the effects of hazards on human health.

Consider having specific provisions in leases that call for indemnification by the tenant to the charity for tenant-created or tenant-allowed environmental hazards. Of course, such a provision is only as good as the tenant's net worth.

All the above points out the need for continued vigilance by the charity: regular visits to the farming operation; periodic reports by the tenant on how hazardous substances are being handled and disposed of; scheduling of environmental assessment if problems are being detected or suspected, etc.

Other Considerations


  • Liability

  • Casualty and extended coverage

  • Crop insurance: This is relatively expensive and not universally purchased by all farmers. However, even if the tenant farmer obtains coverage, it's only for the tenant's interests; the charity as landowner must get its own if it deems it appropriate. There may be a savings on premium cost if it is purchased together.


It is possible the land will be placed on the exempt rolls on the basis that it is owned by a tax-exempt entity, but don't count on it. And even if it is, it may not be a popular move to take a major significant source of school and other local funding off the tax rolls. Some charities agree to pay an "in-lieu-of" payment, a voluntary payment substantially equal to the taxes. This increases the cost of owning the land, but it may be money well spent in terms of public relations. It amounts to a balancing of the overall image of the charity with the need to optimize the return on the individual gift to fulfill obligations to that particular donor.

Donors' Continued Involvement

Cultivation and stewardship issues are often involved here. Keeping the donor (or heirs) in the loop without giving them too much authority can be challenging.

Valuation and Insurance

A valuation may be needed periodically. The cost should be borne by the property's income stream.

Title insurance should always be obtained. It's a rare case that a title company has to make good on a policy, since all title flaws and glitches are almost always caught and noted at the time the preliminary report is issued. So, buying a policy for the full fair market value may be an unnecessary expenditure. Consider buying coverage only to the minimum limits required by the title company, which may be based on assessed value.


A warranty deed is preferable, but many donors' attorneys will advise their clients to use a bargain and sale deed or quit claim deed. Examine the title commitment closely for such things as exact names of donors, encumbrances of record, accurate legal description, etc.

A deed is a document with considerable legal implications and should be prepared by an attorney. If prepared by the donor's attorney, it should be reviewed by the charity's legal counsel before execution and delivery.

Farmland Funding a Charitable Remainder Trust

Farmland can be used as a funding vehicle for a charitable remainder trust, but special factors need to be considered.

A NIMCRUT may be the only choice as farmland often has a very low return when based on fair market value. A return based on appraised value may be less than 5%. A charitable gift annuity is a possibility if the charity is prepared to make up potential shortfalls in income from other sources.

Virtually all the issues inherent in outright ownership apply to trust ownership. Additional factors unique to trust ownership:

  • "Disqualified Person Syndrome:" Donor's continued involvement as a "consultant," "advisor," or even as a manager.

  • Self-dealing: Probably a non-issue as long as donor's involvement is not extensive and he/she is not being paid excessively. See Reg. §53.4941(d) for explanation of transactions deemed to be self-dealing. This regulation allows for donor involvement without occasioning self-dealing issues-even to the point of payment for services rendered-so long as the donor is not involved in ultimate management decisions regarding the trust, and is being compensated for services rendered at rates not to exceed the industry standard.

  • The donor's ongoing participation may be the key to good tenant relationships, as well as donor relations.

Valuation Issues

Code §664(d)(2)(A) specifies the net fair market value of trust assets need to be valued annually. We all know the duties incumbent on the donor to substantiate his/her deduction: A "qualified appraisal" is necessary if the charitable deduction will exceed $5,000. [Reg. §1.170A-13(c)(1)(I] An "appraisal summary" must be attached to the return on which the deduction is first reported. [Bond v Comm'r, 100 T.C. 32 (1993)] And, the donor must keep adequate records of valuations, etc. [Reg. §1.170A-13(c)(2)(i)]

But after that? The Code and regulations don't address the issue of annual re-valuations by the trustee with the same degree of minute detail that they do for the original gift. Should re-valuation be an automatic thing? Farmland appraisals can be very costly and could easily eat up all, or a majority of, the income from the land-maybe even exceed it.

Possible (although unproven) ways to address this are to: 1) key the annual re-valuations to changes in assessed value; 2) commission a full commercial appraisal every specific number of years (e.g., five), and do an in-house "appraisal" on the off years; and 3) ask the original appraiser to conduct a mini-appraisal, market study, or update to the first once a year for a greatly reduced cost.

Rental Income

Cash Rent: No problem, as IRC §512(b) excludes real property rental income from UBTI when certain conditions are met.

Crop Shares: Is this potential UBTI? It shouldn't be as rents from real property are excluded if determination thereof is based upon a fixed percentage of gross receipts or sales.

Query: Many farmland leases provide that the owner will pay for certain operating expenses, such as a portion of fertilizers and chemicals. Does this affect the term gross?

Sale of Harvested Crops: Timing of the sale can be crucial by reason of volatility of the commodities market and can create a potential pitfall. Consider including exculpatory language in the trust document.

Frequency of Trust Payments

Consider: Farmland usually pays income only once a year, so trust payments should be geared to the income stream. If trust income is essentially annual, then payments to the beneficiary should basically coincide, preferably (in most cases) at end of calendar year. Depending on the accounting year, more frequent payouts may be permitted.

Continuing the trust beyond lives of donors (i.e., for succeeding income beneficiaries). Caution is warranted in this regard. Succeeding life income beneficiaries may not have any charitable inclinations and probably won't understand farm income and management issues as well as the original donors. The NIMCRUT concept could further alienate them, if distributable income in a given year should dip below the set unitrust rate. There is greater potential for claims of mismanagement, even if unsubstantiated. There must be a clear-cut understanding with the donor.

It is always best to lay out all issues up front, but there is still the likelihood that unforeseen issues will emerge later. This emphasizes the need for ongoing communication, and points to the need for flexibility in the governing instrument.


As indicated above, farmland can be a wonderful gift for charity, even when the donors want the charity to retain it in its present form, and to use it as an investment vehicle. But before embarking on such a gift program, or even considering an offer of farmland where the intention is that it be retained, a charity must consider all the factors in such ownership and determine for itself if it has the means and capabilities to do so. The foregoing is intended to touch upon at least some of the issues, and potential problems that can be encountered. It is not meant to be an exhaustive study of all possibilities, concerns, perils, and risks inherent in farmland ownership, nor is it intended to be considered as legal or real estate advice. Any charity considering the offer of farmland under these conditions, or the implementation of a policy for such purposes, should consult its own legal advisors and real estate experts for help in determining the course of action it should take.

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